The real estate profession loosely tosses around the terms “pre-qualification” and “pre-approval” as though they are one and the same.
But they aren’t.
A pre-qualification is an estimate of a borrower’s ability to qualify for a loan, often based upon a phone call or submitting a form on the lender’s website.
With a pre-qualification, there’s often no verification of the borrower’s ability to qualify for a mortgage loan.
A pre-approval, on the other hand, usually includes the lender taking a formal application, credit review, employment verification, a review of debt-to-income ratios, a review of pay stubs and tax returns, followed by a written loan commitment from the lender.
Simply stated, a pre-approval includes a more thorough analysis of the buyer’s ability to obtain financing and is far more reliable.
If you’re a seller, you should make sure your buyer is pre-approved to avoid taking your home off the market for a transaction that may fail due to the buyer’s financing.
If you’re a buyer, you should also get pre-approved so you know and understand the details of your financing before making an offer to purchase a home.